What Happened to Cannabis?
If we want to know why a company is in trouble, all we have to do is ask the customers. Since I don’t smoke weed, but had the opportunity of having lunch with someone who does, I asked his opinion. If weed is becoming more legal every day, dispensaries are on every corner in major cities, and states are decriminalizing or legalizing at a noteworthy pace, why are cannabis companies trading in the penny stock range, down 95% or more from their highs of 2018?
As you might guess, weed is still very popular. However, what I learned from my friend is that you will pay twice as much and get carded at a dispensary… or you can have it delivered, pay half the retail price and remain anonymous. The black market is the biggest competition to cannabis brands. They know this.
Cannabis Companies Scramble to Stay Alive
When valuations soared and capital was easy to access and cheap, cannabis companies went on a buying spree. Over the past year, the elusive “pathway to profitability” became the only way to raise funds to survive. HEXO, the number one cannabis brand in Canada, was rescued (purchased) by Tilray. Tilray has also invested a 65% stake in MedMen. The company is expanding into craft beer and spirits. Sweetwater Brewing, Montauk Brewing and Breckenridge Distillery are all in the Tilray tribe. Manitoba Harvest is offering Hemp Yeah! Granola at Whole Foods.
As CEO Irwin Simon said in the company’s July 26, 2023 earnings call:
Tilray is not building its entire business model around the eventual promise of legalization. But, rather unlike others in our sector, we are diversifying beyond cannabis by building a strong balanced portfolio consisting of successful, profitable stand-alone beverage alcohol and wellness brands in the US, along with a strategic distribution business in Europe, each with high growth opportunities in their own right. Legalization will happen one day, but we're not waiting for it. We're not dependent upon it.
Canopy Growth was attempting a similar strategy with their BioSteel sports nutrition unit. However, in their June 22, 2023 earnings release, the company revealed that Biosteel had been overstating revenue and paying bonuses to insiders based upon those erroneous numbers. With an annual loss of -$3.3 billion in fiscal year 2023 and fuzzy math with self-dealings in one of their major brands, Canopy Growth is in a restructuring mode, trying to conserve their $783 million in cash and short-term investments (as of March 31, 2023). Revenue was down -21% in FY2023 from the prior year. Canopy will report their earnings for the quarter ending June 30, 2023 on August 9, 2023 at 5:30 ET.
Meme Stocks, YOLO and Shoot the Moon
Cannabis stocks have enjoyed Shoot the Moon meme stock YOLO rocket ship rides, once in September 2018 before Canada legalized weed, again in early 2019, and then once more in January of 2021, after the U.S. House of Representatives voted to decriminalize cannabis on Dec. 4, 2020. (The MORE Act stalled out in the Senate and was never signed into law.) Tilray traded as high as $300/share in September of 2018. Shares are currently at $2.37.
In between these headline-driven events, pot stocks crash and burn. When a major country looks like it’s going to legalize weed, everyone jumps in and pushes the price far above rational valuations. The spreads between the top and the bottom are just too severe to use limit orders. (The brokerages won’t let you put the price high enough to capture a Shoot the Moon launch.) Investors have to keep their radar up for major news, have a stock app on their smart phone, consider price alerts and move quickly when the run-up begins. There is a lot of work involved in profiting on YOLOs like cannabis (and crypto), and one must endure long winters of discontent before halcyon days arrive again.
Both the U.S. and Germany have flirted with legalization, and both countries are stalled out in the politics of the matter. Germany is moving forward with a plan to legalize for personal use, and there might be news on that in 2023. Meanwhile, states keep decriminalizing, Tilray keeps selling beer, whiskey and hemp granola, and the black market dealers rake in more profits than the dispensaries…
Since most of these companies are still cash negative, a price/sales ratio can be a helpful valuation tool. BZAM (formerly The Green Organic Dutchman) has a very low price/sales ratio, while Tilray’s is reasonably low, when considering their expected growth in sales this year. BZAM’s year-over-year revenue growth is outstanding, at 128%. However, the company’s C-Suite struggles, cash burn and penny stock status make it very high risk. Innovative Industrial Properties and Cronos are very expensive when using the price to sales valuation tool, at 7 and 8, respectively. Canopy Growth could be a bargain. However, given its struggles to restructure, the Biosteel debacle and the skin-singeing cash burn, the company is not winning the war against the black market, or winning over the sports nutrition customer.
Meme Stock Strategies
It’s tough to catch a shooting star. By the time you see it, it’s already fizzled out over the horizon. It’s a reminder that individual companies, and certainly meme stocks, are casino bets, not a nest egg strategy. We should gamble with money we’re willing to lose. Also, they require babysitting, and a knowledge of what makes them take off in the first place, so you’re in the right place at the launch. For cannabis, launches tend to coincide with big news on country legalization – something that hasn’t happened since the failed U.S. attempt in late 2020.
Also, meme stocks are definitely not HODL (Hold on for Dear Life), nor is Buy & Hope a good nest egg strategy. In today’s world, it’s important to take profits early and often in individual companies – to adhere to the tried and true Buy Low/Sell High mantra.
Buy & Hope in our nest egg strategy only works in a bull market. When recessions hit, everything can tank by 50% or more overnight, and take years to crawl back to even. (Stocks dropped over -35% between Feb. 19 and March 23, 2020. The Dow Jones Industrial Average plunged 55% in the Great Recession; while the NASDAQ sank an astonishing 78% in the Dot Com Recession and took 15 years to recover.) So, with our nest egg, apply Modern Portfolio Theory, regular rebalancing and a Capture Gains mindset (something we teach at our Financial Freedom Retreats). Since there isn’t a cannabis fund offered by a fund company with a stellar credit rating, and we therefore must pick individual companies, we have to adopt a hybrid approach when including cannabis in our plan.
Tilray is attracting a lot of bullish posts on Reddit and X (Twitter) – much more than Canopy Growth, BZAM (formerly The Green Organic Dutchman) or Cronos. However, there has been so much shorting action on the stock, that it hasn’t been able to break out. In addition to being the favorite on the bulletin boards, it’s also the best-looking company on the Stock Report Card (although the longshot, off the boards penny stock BZAM has much higher year-over-year revenue growth). The management team at Tilray seems to be making all the right moves with its M&A strategy (unlike Canopy Growth). At some point, any of the Tilray brands could start making headlines, or perhaps Germany will move forward with its plan for legalized personal use of cannabis this year. Either way, it appears that Tilray’s future is starting to look brighter, and is well-positioned should that supernova event occur.
Full disclosure: I own Tilray and BZAM stock.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.